Cablegate: Foreign Exchange Shortage Hurts U.S. Businesses

VZCZCXRO4841
RR RUEHROV
DE RUEHDS #2569/01 2611413
ZNR UUUUU ZZH
R 171413Z SEP 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 2056
INFO RUCNIAD/IGAD COLLECTIVE
RUEPADJ/CJTF HOA
RUEAIIA/CIA WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RUEWMFD/HQ USAFRICOM STUTTGART GE
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0121
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 ADDIS ABABA 002569

SIPDIS
SENSITIVE

DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD
DEPARTMENT PASS TO USTR FOR BILL JACKSON, CECILIA KLEIN, AND BARBARA
GRYNIEWWICZ
DEPT OF COMMERCE WASHDC FOR ITA BECKY ERKUL
DEPT OF TREASURY WASHDC FOR REBECCA KLEIN, BILL PELTON, ANTHONY
MARCUS, MATTHEW MOHLENKAM, AND CELINE SENSENEY

E.O. 12958: N/A
TAGS: BEXP ECON EFIN ETRD EINV ET
SUBJECT: FOREIGN EXCHANGE SHORTAGE HURTS U.S. BUSINESSES

REF: A) ADDIS ABABA 753
B) ADDIS ABABA 2325

ADDIS ABAB 00002569 001.2 OF 004

SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET DISTRIBUTION

SUMMARY
-------

1. (SBU) The limited supply of foreign exchange (forex) in
Ethiopia's banks has begun to take a toll on U.S. commercial
interests as private and public entities have increasingly become
unable to import essential consumer inputs and industrial capital
goods from abroad or get hard currency to repatriate profits abroad.
As a result, some prominent U.S. business interests in Ethiopia
such as Coca Cola, Proctor and Gamble and Caterpillar are
considering suspending business operation in Ethiopia. The
Government of Ethiopia's (GoE) recent tightening of the banking
regulations to manage its limited forex reserves has dampened real
supply for certain desired consumer and industrial imports and has
precipitated a foreign exchange crunch. The GoE's opaque allocation
process of its dwindling forex reserves may signal an unofficial
hierarchy among economic sectors and priority programs, with the
state-driven growth in construction, transport and communication as
well as domestic food and agricultural subsidization programs taking
the lion's share of reserves. Moreover, the GoE's forex allocation
process has caused grumbling in the private sector about the
inequality in accessing Ethiopia's banking resources. End Summary.

BACKGROUND
----------

2. (U) With a trade deficit equivalent to 23 percent of GDP and hard
currency reserves able to cover only six weeks of imports, Ethiopia
is facing an acute shortage of hard foreign currency reserves. The
National Bank of Ethiopia's (NBE, Ethiopia's Central Bank) recent
unofficial policy response of reducing the flow of forex to the
market has squeezed the bottom line for both commercial and public
sector entities and has in many cases inhibited the ability of
businesses to operate. The GoE has even gone as far as to eliminate
the previously open and thriving black market for forex, which has
exacerbated the supply of hard foreign currency (Ref A). Since
March 2008, the NBE has been reluctant to sell foreign exchange to
the inter-bank market and has effectively cut supply and authority
of commercial banks to sell forex to private companies without prior
approval from either international banking divisions at banks' head
offices, the NBE Governor and lastly the Prime Minister's office.

3. (U) The GoE's forex crunch can be attributed to recent exogenous
and endogenous shocks that have rapidly depleted its coffers:
soaring external oil prices and soaring internal inflation, as well
as rising demand for imported consumer and industrial goods. The
exogenous shock resulting from the surge in global oil prices has
forced the GoE to draw down rapidly on its forex reserves simply to
meet its soaring domestic fuel bill. An economist at the NBE
informed EconOff that the GoE is paying as much as USD 50 million
every month for a fuel subsidy in order to cushion the local market
from the record rise in fuel costs. Additionally, the GoE has
significantly drawn downs its forex coffers due to endogenous
pressures such as the government's move to import wheat at a cost of
USD 165 million in order to offset record high food inflation (Ref
B); and the growing demand for import of capital goods and
intermediate inputs for the state-driven growth in construction,
transport and communication, as well as in light manufacturing and
agriculture sectors.

WHERE NOT EVEN COCA COLA CAN OPERATE
------------------------------------

4. (SBU) Coca Cola's primary bottling facility in Addis Ababa, Coca
Cola Sabco, is facing an impending production halt in Ethiopia as a
result of the forex limitation. As a result of the severe inventory
shortfall, Coca Cola Sabco estimates that it only has roughly two
weeks of stock ingredients to produce its key consumer goods such as
Coke and Sprite soft drinks for the Ethiopian market. Coca Cola's
senior public relations manager said that Coca Cola will be forced

ADDIS ABAB 00002569 002.2 OF 004

to cease production in Ethiopia after two weeks if the forex
situation has not ameliorated to allow it to replenish key imported
ingredients due to its inability to pay its overseas suppliers in
hard currency.

5. (SBU) Coca Cola Sabco has been in business in Ethiopia for close
to fifty-seven years and has made significant investments to build
up the existing soft drink market and infrastructure in Ethiopia.
According to Coca Cola's in-country representative, Coca Cola boasts
over fifty-six percent of the soft drink market share in Ethiopia
and has experienced double digit growth in the last six years, with
twenty-plus percent growth in business in 2007. As a result of the
booming demand, Coca Cola Sabco had convinced its headquarters and
several large investors to commit USD 100 million to open two mega
production facilities in Debre Zeyit and Dire Dawa in order to meet
the soaring demand for Coca Cola products in Ethiopia and the East
Africa region. Ethiopia was slated to be one of twelve countries in
Africa and Asia to host a mega bottling facility. The current forex
crunch and broader market indicators have forced the company to
suspend plans to pursue the USD 100 million expansion.

6. (SBU) Coca Cola Sabco has tried to offset its forex crisis by
sourcing inventory from local sugar, bottle and crate manufacturers,
but has faced serious quality control issues and a margin crunch
(local sugar is more expensive than imported). Coca Cola Sabco has
also reached out to the GoE backed banks to secure alternative
credit arrangements, such as extending a letter of credit at the NBE
using Coca Cola's name to continue imports. The company has also
attempted to initiate a franco valuta agreement with the government,
which would allow direct soft loans of hard currency from Coca
Cola's international headquarters to Coca Cola Sabco. A franco
valuta agreement would bypass Ethiopia's banking sector and allow
foreign corporations or investors to fund directly the local Coca
Cola bottler's production and capacity needs. Since the franco
valuta scheme had been effectively outlawed in the mid-1990s only
domestic cement importers have been able to utilize this mechanism
to meet the demands of the government-backed construction sector.
In spite of Coca Cola's repeated pleas to the NBE and GoE officials,
all requests for alternative solutions to its forex crisis have
fallen on deaf ears.

PROCTOR AND GAMBLE: NO FOREX TO IMPORT CONSUMER GOODS
--------------------------------------------- --------

7. (SBU) Proctor and Gamble (PG) has also been severely impacted by
the foreign exchange crunch in Ethiopia. PG's External Relations
Manager for the East Africa region reported to EconOff that business
has been stalled in many of his company's leading consumer products
due to the foreign exchange shortage. Despite sustained and growing
demand, PG's primary distributor in Ethiopia (Petram) has not been
able to access forex to meet its import bills for future orders of
PG consumer products slated for the Ethiopian market. To date, PG
has been one of the top market leaders in the sale of consumer
products (i.e. fabric care, feminine care and household goods) in
the Ethiopian market, clocking double digit growth over the last
five years. In spite of enjoying a hefty market share and rapid
growth in Ethiopia, PG's External Relations Manager for the East
Africa region said that "PG is being forced to reconsider Ethiopia
as a viable market, pending a change in the foreign exchange
market." According to Petram and PG officials, Dashen Bank, the
primary bank that allocates reserves to Petram cannot accept new
applications for foreign exchange until it clears a significant
backlog. Currently, Petram has been out of stock on Ariel washing
detergent (PG's leading consumer product by sales in Ethiopia) for
the past three weeks.

8. (SBU) PG and Petram have recently decided to move from a monthly
order schedule to a quarterly order schedule in order to offset the
foreign exchange shortages. PG and Petram are currently stocking up
products slated for Ethiopia in Djibouti (where Petram is incurring
additional demurrage costs) and will import them into Ethiopia in
small quantities as reserves become available. The PG
representative said that as long as the forex reserve market
worsens, PG will have no choice other than to stop all new orders of
its products to Ethiopia and, as a last resort, completely pull out

ADDIS ABAB 00002569 003.2 OF 004

of the Ethiopian market.

CATERPILLAR: GETTING FOREX LIKE MOVING MOUNTAINS
--------------------------------------------- ---

9. (SBU) Similarly, Ries Engineering, one of Ethiopia's largest
industrial equipment importers (50 percent market share) and
exclusive distributor for Caterpillar, Massey Ferguson and Perkins,
has seen its new orders for Caterpillar component parts and new
heavy-duty machinery take a serious dip as a result of the foreign
exchange crunch. According to Ries's sales and marketing manager,
the company is anticipating a halving of its USD 80 million annual
Caterpillar business as a result of the foreign exchange situation.
Ries's sales manager told EconOff that the company has had real
difficulty in being able to stock new component and service parts
for its existing Caterpillar clients due to the unavailability of
forex. The component parts make up the "bread and butter" of Ries's
sales, as existing clients need regular maintenance of equipment.
Moreover, Caterpillar has signaled to Ries that it cannot honor any
of its future orders of new heavy duty machines. At this time, Ries
has adequate levels of inventory to service its clients' needs in
the near term. However, the company projects significant business
decline, i.e. up to 50 percent of its current revenue, if they are
not able to replenish their inventory.

FOREX HAMPERS GOE TRAVEL
------------------------

10. (SBU) Traveling GoE officials are not immune to the forex
shortage in Ethiopia. Recently, several GoE officials traveling
overseas for meetings found themselves unable to access forex from
the National Bank of Ethiopia (NBE), the primary forex provider for
traveling GoE officials. Post has learned through an NBE source
that the NBE suggested to the traveling GoE officials to make an
official plea to the NBE Governor or Prime Minister's office in
order to obtain clearance to access hard currency in order to
facilitate their travel outside of Ethiopia. The NBE official
disclosed that prior to the NBE's tightening on forex to the
interbank market, the NBE as well as other local bank branch offices
did not have to consult the NBE governor or get prior approval from
the Prime Minister's office to allocate foreign currency requests to
clients. Local banks could entertain requests for amounts up to USD
one hundred thousand per transaction at any given time. However, in
light of the NBE's recent unofficial mandate to limit the flow of
forex, only the international banking divisions at banks' head
offices or the Prime Minister's office are authorized to evaluate
and approve every single foreign currency request.

ETHIOPIAN STUDENTS CANNOT PAY U.S. SCHOOL FEES
--------------------------------------------- -

11. (SBU) Ethiopian students studying abroad have been directly
affected by the GoE's placement of foreign exchange limits (USD one
thousand USD cash and USD two thousand in traveler's checks) for
travelers going out of the country. According to a recent e-mail
sent to U.S. Embassy Addis Ababa consular section, by Michael J.
Murphy, an International Student Counselor in the Office of
International Affairs at Texas Tech University, a growing number of
Ethiopian students at his University are being pinched by the forex
limitations in Ethiopia. Murphy noted that over the past two years
most of the Ethiopian students matriculating at Texas Tech
University cannot meet their financial obligation as a result of
their families' inability to access foreign exchange in Ethiopia.
At this time, the NBE does not have provisions which allow parents
to send money by wire transfer to children who are studying in the
U.S. for their living expenses.

COMMENT
-------

12. (SBU) An acute shortage in Ethiopia's foreign exchange market
has stalled business in both the private and public sectors and is
hurting U.S. business interests in Ethiopia. In addition, local
consumers may soon feel the pinch in their now strained budgets as
already high inflation may be compounded due to a supply shortfall

ADDIS ABAB 00002569 004.2 OF 004

in the much desired consumer goods. The real effects of limited
reserves and a growing perception among private businesses of
inequality in the allocation of foreign exchange may be leading to a
dramatic drop in private business confidence of the Ethiopian
market. This trend could lead to rent-seeking behavior at the local
banks, as private companies clamor to have their forex requests
quickly fulfilled in spite of long waiting lists at most banks.
There appears to be a real risk of a domino effect of United States
and other foreign businesses stopping business in Ethiopia as
banking regulations tighten and market confidence dwindles. While a
liberalization of Ethiopia's foreign exchange regime would allow for
the depreciation of Birr (which is currently estimated to be more
than 30 percent overvalued), GoE officials have rejected such an
option as it would further exacerbate the already unprecedented
inflation. Ambassador and PolEcon Chief will raise concerns over
the viability of the existing regime and its impacts on U.S. trade
and investment with the Economic Advisor to the Prime Minister in
coming weeks. The Embassy will continue to urge the GoE to open the
financial sector and otherwise liberalize the economy in order to
address forex concerns and other structural imbalances. END
COMMENT

YAMAMOTO

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